End of the Oil Age: Not whether but when

A trans­porta­tion rev­o­lu­tion is un­der­way that could com­pletely trans­form the oil mar­ket in the com­ing decades.

Financial Nigeria Magazine - - Contents - By Reda Cherif, Fuad Hasanov, and Aasim M. Hu­sain Reda Cherif, Fuad Hasanov, and Aasim M. Hu­sain are econ­o­mists with the In­ter­na­tional Mone­tary Fund. Source: IMF Blogs

When oil prices sud­denly halved from over $100 a bar­rel in 2014, our IMF study con­cluded that sup­ply-side fac­tors such as the emer­gence of shale and new tech­nolo­gies would be a key force keep­ing oil prices “lower for longer.” More re­cent stud­ies sug­gest that other new tech­nolo­gies, such as the spread of elec­tric cars and so­lar elec­tric­ity gen­er­a­tion, could even more pro­foundly af­fect the oil mar­ket and the long-term de­mand for oil. As Sheikh Zaki Ya­mani, a for­mer Saudi oil min­is­ter, once said, “The stone age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.”

A hun­dred years ago, coal ac­counted for close to 80 per­cent of US en­ergy con­sump­tion. Within 20 years, that share fell to one-half, and within 40 years to only one-fifth as oil dis­placed coal as the world's main en­ergy source. This hap­pened even though coal was cheaper than oil, be­cause there was no real al­ter­na­tive to power mo­tor ve­hi­cles, which quickly went from an ex­otic lux­ury to the pre­ferred means of per­sonal trans­porta­tion. To­day, au­to­mo­biles ac­count for about 45 per­cent of oil con­sump­tion in the world. With the rise of elec­tric ve­hi­cles and re­new­able en­ergy, the world may be on the verge of a rev­o­lu­tion in trans­porta­tion and en­ergy tech­nol­ogy that could trans­form the oil mar­ket the way the coal mar­ket was trans­formed a cen­tury ago. Like coal then, oil could see its share in en­ergy de­mand plum­met in the com­ing decades.

The year 1917 – when Ford first sold a mass-pro­duced, af­ford­able ve­hi­cle – was a tip­ping point. Elec­tric ve­hi­cles may be about to hit a sim­i­lar tip­ping point: sev­eral com­pa­nies are start­ing to of­fer mod­els for about $35,000, roughly the av­er­age price of a new mo­tor ve­hi­cle in the United States to­day. With their much lower main­te­nance and fuel costs, it is hard to deny that elec­tric ve­hi­cles could dis­place a siz­able num­ber of mo­tor ve­hi­cles in the not-too-dis­tant fu­ture. The ques­tion might be not so much “whether” as “when.”

Draw­ing from the ex­pe­ri­ence of the dis­place­ment of horses by mo­tor ve­hi­cles in the early 20th cen­tury, our re­cent IMF work­ing pa­per pre­dicts that elec­tric cars could rep­re­sent 90 per­cent of the stock of cars in ad­vanced economies and more than half in emerg­ing mar­ket economies by 2040. Oth­ers also pre­dict a siz­able dis­place­ment of mo­tor ve­hi­cles, al­beit at a slower pace.

But wouldn't an in­crease in de­mand for elec­tric­ity to power th­ese ve­hi­cles give a boost to the mar­ket for oil to run gen­er­at­ing plants? Not re­ally. Oil's share of the mar­ket for elec­tric­ity gen­er­a­tion and heat­ing is al­ready less than 20 per­cent glob­ally, and that could shrink fur­ther be­cause of the rise of an­other new tech­nol­ogy: re­new­able en­ergy.

Re­new­ables have also wit­nessed rev­o­lu­tion­ary de­vel­op­ment in the past decade. The cost of pro­duc­ing elec­tric­ity from so­lar power has fallen by 80 per­cent since 2008 and from wind power by 60 per­cent. Un­sub­si­dized so­lar and wind en­ergy, al­ready com­pet­i­tive in 30 coun­tries, is pro­jected by the World Eco­nomic Fo­rum to be­come cheaper than coal and nat­u­ral gas in more than 60 per­cent of the world in the next few years. Even with­out fur­ther tech­no­log­i­cal ad­vances, the pen­e­tra­tion of re­new­ables will spread as ca­pac­ity in­vest­ments al­ready un­der­way are com­pleted.

Whether re­new­ables and elec­tric ve­hi­cles spread as rapidly as pre­dicted, over the next 20 years they will crowd out the de­mand for oil sub­stan­tially. And if cli­mate change con­cerns in­ten­sify, the trans­for­ma­tion of the world oil mar­ket could be even faster. Even more so if other new tech­nolo­gies, like fuel cells, hy­dro­gen-based power gen­er­a­tion, ride shar­ing, and au­ton­o­mous driv­ing also take off. So even though it is hard to say which way oil prices will go next week or next month, by 2040 oil will be much cheaper than it is to­day, and the equiv­a­lent of $50 a bar­rel might seem im­pos­si­bly high then.

With that out­look, it is no sur­prise that oil pro­duc­ers and au­tomak­ers are get­ting ready for the end of the oil age. Many car com­pa­nies are in­vest­ing heav­ily in elec­tric ve­hi­cle tech­nolo­gies–the re­cent an­nounce­ment by Volvo that all its mod­els will have elec­tric mo­tors by 2019 is an ex­am­ple. Sim­i­larly, many oil-ex­port­ing coun­tries, which rely on oil rev­enue to fi­nance govern­ment pro­grammes and gen­er­ate jobs, have wisely launched widerang­ing di­ver­si­fi­ca­tion drives to ready their economies for cheaper oil.

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